WP/15/73

Electronic Fiscal Devices (EFDs)

An Empirical Study of their Impact on Taxpayer Compliance and

Administrative Efficiency

by Peter Casey and Patricio Castro

International Monetary Fund WP/15/73

IMF Working Paper

Fiscal Affairs Department

Electronic Fiscal Devices (EFDs)

An Empirical Study of their Impact on Taxpayer Compliance and Administrative

Efficiency

Prepared by Peter Casey and Patricio Castro

Abstract

Several administrations have adopted electronic fiscal devices (EFDs) in their quest to

combat noncompliance, particularly as regards sales and the value-added tax (VAT)

payable on sales. The introduction of EFDs typically requires considerable effort and has

costs both for the administration and for the taxpayers that are affected by the

requirements of the new rules. Despite their widespread use, and their considerable cost,

EFDs can only be effective if they are a part of a comprehensive compliance improvement

strategy that clearly identifies risks for the different segments of taxpayers and envisages

measures to mitigate these risks. EFDs should not be construed as the silver bullet for improving tax compliance: as with any other technological improvement the deployment

of fiscal devices alone cannot achieve meaningful results, whether in terms of revenue

gains or permanent compliance improvements.

JEL Classification Numbers: H20, H24, H25

Keywords: Tax administration, electronic fiscal devises, noncompliance, VAT

Authors E-Mail Address: p.casey.imf@gmail, pcastro@imf.org

This Working Paper should not be reported as representing the views of the IMF.

The views expressed in this Working Paper are those of the author(s) and do not necessarily

represent those of the IMF or IMF policy. Working Papers describe research in progress by the

author(s) and are published to elicit comments and to further debate.

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Acknowledgments

This paper is the culmination of the efforts of numerous persons. A list of participants from

various revenue administrations is contained in Appendix I to this paper. Mr. Njeru Kirira

undertook the interviews with the business associations in Kenya and Ethiopia.

Special mention should be given to Mr. Abeid Kasaizi and Mr. Steven Charles of the

Tanzania Revenue Authority (TRA), who both gave willingly of their time to facilitate the

discussion of the TRAs experiences with fiscal devices. Similarly, thanks need to be

extended to Ms. Tei Kim of the National Tax Service of Korea, and the numerous staff

members who provided such a comprehensive overview of the technological advances in

place in the Republic of Korea that are founded on the use of fiscal devices.

Mr. Peter Casey and Mr. Patricio Castro were the main authors of the paper. Mr. Castro also

oversaw the assessment of survey responses for Latin America. Messrs. Oscar Vazquez and

Sergio Rufail provided valuable input in this area, as well as some useful suggestions on how

to assess the impact of compliance enhancement measures introduced by tax administrations.

Ms. Katherine Baer provided additional editorial comments.

Finally, thanks also to Dr. Melissa Casey for her assistance in the design of the survey.

The authors views as expressed in this paper do not necessarily reflect the views of the

Fiscal Affairs Department (FAD) of the International Monetary Fund. As always, all errors

and mistakes in this paper are the authors sole responsibility.

The research leading to this paper would not have been possible without the generous support

of the donor governments of the Tax Policy and Administration Topical Trust Fund, which

are listed individually on the following page.

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Acknowledgments

This publication has been made possible thanks to generous support of the Tax Policy and

Administration Topical Trust Fund. The donor governments and organizations that contribute

to this fund are listed below.

Africa, Caribbean and Pacific

Group of States

Belgium

European Union

Germany

Kuwait

Luxembourg

Netherlands

Norway

Switzerland

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Contents Page

Acknowledgments ....................................................................................................................... 2

Executive Summary .................................................................................................................... 7

I. Introduction .............................................................................................................................. 10

II. History of Electronic Fiscal Devices ...................................................................................... 13

A. First Wave .............................................................................................................. 13

B. The Spread of EFDs ............................................................................................... 14

C. Current SituationUse and Technology ............................................................... 18

III. Drivers for EFDs ................................................................................................................... 23

A. Mandated Implementation ..................................................................................... 25

B. Drive for Administrative Efficiency ...................................................................... 25

C. Compliance Response and Impact of Adoption of EFDs ...................................... 26

IV. Analysis of Survey responses ................................................................................................ 30

A. Scope of Fiscal Devices ......................................................................................... 30

B. EFDs and the Compliance Model .......................................................................... 30

C. Administrative Impacts .......................................................................................... 33

D. Implementation and Operational Considerations .................................................. 35

V. Outcomes ................................................................................................................................ 41

A. Compliance Improvement ..................................................................................... 43

B. Cost-Benefit Analysis ............................................................................................ 47

C. Additional Considerations ..................................................................................... 49

VI. Conclusions ........................................................................................................................... 51

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List of Figures

1. Adoption of EFDs Internationally ........................................................................................... 14

2. Greece: VAT as a percent of GDP, 1987-2010 ....................................................................... 16

3. Types of Fiscal Devices in Use in Surveyed Countries .......................................................... 23

4. Reported Benefits of Fiscal Devices ....................................................................................... 28

5. Kenya: VAT as a percentage of GDP, 19912013 ................................................................. 29

6. Tanzania: VAT Collections (gross and percentage of total collections), 19982013 ............. 32

7. Allowed Implementation Period ............................................................................................. 36

8. Stakeholder Engagement during Implementation ................................................................... 38

9. Maintenance and Support Agreements .................................................................................... 40

10. Selected Countries: Relative Changes in VAT Revenue Collection ..................................... 42

11. Types of Financial Support for Fiscal Device Costs ............................................................. 49

List of Tables

1. Current EFD Implementations ................................................................................................ 15

2. Comparison of Risks Pre- and Post-Implementation of Fiscal Devices ................................. 31

3. Device Implementation Costs and Return on Investment ....................................................... 47

List of Boxes

1. Greece: Experiences with EFDs Overview of Electronic Fiscal Devices ........................... 16

2. Overview of Electronic Fiscal Devices ................................................................................... 19

3. Kenya: Experiences with EFDs An Analysis of Revenue Performance ............................. 29

4. Case Study Tanzania ........................................................................................................... 32

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ABBREVIATIONS AND ACRONYMS

B2B Business to business

DGII Direccin General de Impuestos Internos

ECR Electronic Cash Register

EFD Electronic Fiscal Device

EFP Electronic Fiscal Printer

ERCA Ethiopia Revenue and Customs Authority

ESD Electronic Signature/Sales Device

ETR Electronic Tax Register

GDP Gross Domestic Product

GPRS General Packet Radio System

IDB Inter-American Development Bank

IT Information Technology

KRA Kenya Revenue Authority

NTS National Tax Service (Republic of Korea)

POS Point of Sale system

TRA Tanzania Revenue Authority

VAT Value Added Tax

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EXECUTIVE SUMMARY

The primary mission of a tax administration is to collect the revenue that is due from

taxpayers and needed by the government, under the countrys tax laws, without hindering

economic activity. The greatest challenge for any tax administration is achieving and

maintaining a high degree of self-assessment and voluntary compliance by taxpayers. Well-

designed taxpayer services, education programs, and creative measures can facilitate self-

assessment and compliance. The vexing questions that arise from these simple statements

include how to identify areas of noncompliance; how to measure the level of noncompliance;

and how to address the noncompliance.

The purpose of this study is to assess the performance of a specific set of electronic devices

that revenue administrations sometimes use in support of their collection efforts. In

developed countries, tax administrations have embraced many technological advances used

in the private sector. In this context, information technology (IT)computerization of

systems and business processes of the tax administration, data networking, and associated

technological devicesis a key enabler, and its importance continues to grow, as does the

pervasive role of IT in everyday life. For developing countries, the opportunities offered by

technology are more elusive and the challenges are greater.

Several administrations have adopted various fiscal devices in their quest to combat non-

compliance, particularly around sales and the value-added tax (VAT) payable on sales. The

term Electronic Fiscal Device (EFD) can be used to describe a wide variety of technological

devices that revenue administrations can use to help monitor business transactions. First

implemented in several countries in Europe in the late 1980s, the adoption of these devices

such as electronic tax registers (ETRs) or electronic fiscal printers (EFPs)has accelerated

in recent years in Africa and other regions, following a comparative lull in implementation

activity from 1994 to 2010. The technology is now largely commonly available; production

facilities in a number of developing countries make the devices accessible to businesses at

reasonable costswhich have decreased from thousands of dollars to hundreds of dollars.

Despite their widespread use, there is little documentary evidence to determine whether they

provide a cost-effective solution to address the compliance risks that tax administrations in

developing countries face.

The path to successful implementation of fiscal devices is complex, requiring legislative

support, effective design of administrative and technical procedures, and extensive

consultation processes with key stakeholders. While administrations contemplating the

implementation of these devices can leverage the growing body of experience, the adoption

of these devices creates additional administrative burdens, both to the involved

administrations and to taxpayers, without necessarily alleviating some of the preexisting

compliance problems. Current trends in tax administration modernization suggest there may

be more effective ways to achieve voluntary compliance, particularly through the adoption of

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compliance improvement models. It is clear that technology in and of itself will not change

behavior.

The underlying reasons for the growing interest in compliance improvement models is the

acknowledgement that tax administrations need to adopt risk-based methods to deploy

resources more effectively to meet the greatest revenue risks. At the core of the compliance

improvement model is the requirement for administrations to identify risks, quantify them,

and, on the basis of the risks importance and causes, develop appropriate mitigation

measures. Although the strategy and investments required to fully implement such a model

are certainly long term, its adoption facilitates more efficient and effective operations by

lowering expenses and raising revenues.

A key input to this study was a survey that was administered to a number of tax

administrations known to be users of EFDs. Thirty-seven tax administrations were

approached for this project, some of which were not users of EFDs; of these, 19 agreed to

participate and completed the survey. This study assesses the impact of the adoption of these

devices and identifies the relative benefits of their use. In addition to the difficulties of

assessing the gains derived from the use of EFDs, the biggest challenge is to isolate the

impact of these devices from other reforms that may be taking place concurrently. The

examples gathered from the responses to this survey indicate that there is evidence that EFDs

implemented as part of a comprehensive compliance improvement strategy produced positive

results, both in terms of additional revenue and improved taxpayer behavior. Conversely, in

those cases in which the EFDs were implemented as a standalone measure showed few, if

any, results in the medium term, despite some incidental short-term revenue gains that were

unsustainable.

The underlying hypothesis for this research project was that the adoption of EFDs was a

direct response by tax administrations to combat non-compliance. Analyzing the survey

replies, the drivers for adopting fiscal devices do indeed largely center on matters of

compliancesecuring information for verification, to record sales and improve VAT

compliance. A number of administrations regularly measure compliance and analyze trends

in this area, but the impact of individual measures, such as the use of EFDs, is not usually

assessed independently. Thus, claims of improvements in compliance behavior because of

the use of EFDs are for the most part based on anecdotal evidence and not supported by

actual data.

For purposes of this paper, the trends in VAT revenue collection as a percent of gross

domestic product (GDP) is proposed as a measure of improvement after EFDs have been

implemented. Survey data indicate that the introduction of EFDs has not been associated

with noticeable increases in VAT revenue as a percentage of GDP. Moreover, more often

than not, other reforms are implemented in parallel in an attempt to improve revenue

performance, so that any revenue improvement cannot be directly attributed to the

introduction of EFDs.

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Conclusions

Although much remains to be explored to fully understand the impact of EFDs on

compliance, these results point to the main conclusion of this study: the implementation of

EFDs can only be effective if it is a part of a comprehensive compliance improvement

strategy that clearly identifies risks for the different segments of taxpayers and envisages

implementing a set of measures to mitigate these risks. EFDs should not be construed as the

silver bullet of tax administration: as with any other technological improvementand this

applies as well to new technologies, such as e-invoicingthe deployment of fiscal devices

alone cannot by itself achieve meaningful results, whether in terms of revenue gains or

permanent compliance improvements.

The introduction of fiscal devices presents opportunities for the tax administration to

rethink its approach to business processes, not only by automating the collection of

information, but also by leveraging the new arrangements to improve compliance approaches

and strategies. Another area affecting the use and deployment of EFDs is the constant

evolution of the technology involved, both in terms of cost reduction and improved

performance of the devices. The emergence of new technologies is a constant challenge to

established views on fiscal devices. Several countries approached for the survey indicated

that after studying the effectiveness, costs, and administrative requirements of EFDs, they

had decided that other technologies, in particular e-invoicing, would be more

cost-effective. Accordingly, they had decided against the mandatory deployment of EFDs.

E-invoicing advocates suggest that in this new context, EFDswhose costs must be borne

by traders in all but a few countries that have adopted themare no longer cost-effective

and will eventually fade away.

Another key conclusion from this study is that the introduction of EFDs requires

considerable effort and is accompanied by associated costs both to the administrationin

identifying the technology, selecting the devices, overseeing their deployment, and

monitoring their usageand to the affected taxpayers in addressing the requirements of the

new rules. Once the devices are chosen and available, it is essential that appropriate

arrangements be put in place for their installation, support, and maintenance. Survey

responses confirm that, when these arrangements were not in place or were incomplete, the

implementation of EFDs faced considerable problems. Proper consideration of these factors

is essential for a successful implementation. Moreover, EFDs appear to suffer from similar

challenges as other regimes if there are no effective follow-up and enforcement measures.

Absent effective compliance monitoring and enforcement, overall VAT compliance cannot

be improved, with or without EFDs.

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I. INTRODUCTION

1. The purpose of this study is to assess the performance of a specific set of electronic

devices that revenue administrations sometimes use in support of their revenue collection

efforts. A key definition in this context is that taxes are the compulsory, unrequited

payments to the general government sectora definition that the IMF, the World Bank, and the Organisation for Economic Co-operation and Development (OECD) have adopted.

The tax administration is the division of government tasked with collecting taxes.

Throughout the history of tax administration, a constant tension has existed between the

actions of those whose responsibility it is to ensure compliance with the laws and those

who are subject to those laws. At the heart of this tension is the question of compliance

how to ensure that compliance is maximized; how to ensure continued compliance

(identifying compliance gaps, addressing the gaps, and maintaining confidence in the

system); and how to minimize the impacts, or costs, of the compliance measures.

2. The primary mission of the tax administration is to collect the tax revenues due

and needed by the government, under the countrys tax laws, without hindering economic

activity. In pursuing their mission, tax administrations face a number of challenges,

including how to broaden the tax base by continually bringing non-registrants and

non-filers into compliance, strengthening organization and management, controlling tax

evasion, improving tax collection, and facilitating voluntary compliance. The greatest

challenge for any tax administration is achieving and maintaining a high degree of

voluntary compliance. Well-designed taxpayer services, education programs, and creative

measures can facilitate the process and minimize the burden of compliance.

3. The most widely used method to determine and collect the amount of tax liability

due is the self-assessment and declaration by the taxpayers themselves, coupled with

effective risk-based audit programs and other verification mechanisms of the tax

administration. In effect, under this scheme taxpayers are expected to voluntarily comply

with the countrys tax laws, under the self-assessment/declaration method. The complexity

of tax laws in most countries means that taxpayers must rely on strong and extensive

service programs from the tax administration and/or assistance from professional tax

practitioners to meet their obligations.

4. Modern tax administrations operate a number of core functions that include

taxpayer registration, taxpayer services, returns and payments processing, audits, appeals,

collection of arrears, and fraud investigations. Support functions provide the resources and

guidance to the staff members that perform these functions; among these, information

technology (IT)computerization of systems and business processes of the tax

administration, data networking, and associated technological devicesis a key enabler;

and its importance continues to grow, as does the pervasive role of IT in everyday life.

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5. A tension always exists between addressing revenue compliance risks and the cost

of revenue lost. At the core of this tension lie the regulations put in place by governments

in support of revenue-related activities. Regulations necessarily impose compliance costs

on the private sector and administration costs on governments, even when they are

well-designed and implemented. These costs should ideally be proportionate to the

problem being addressed and the minimum necessary to achieve effective outcomes.

These principles of proportionality, minimalism, and effectiveness are the essential

backbone of the compliance risk models endorsed by the IMF and other organizations and

proposed for use by revenue administrations.

6. To assess the impact of any technological device on the way a tax administration

complies with its mandate, the operating environment in which it conducts its business

processes has to be considered. Operating environment includes a countrys economic

and technological development, the business enabling environment, the complexity of the

universe of taxpayers that a tax administration needs to control, and the tax

administrations relationships and coordination with other government institutions and

private sector groups that are engaged in activities related to revenue collection.

7. The primary objective of any tax administration is to encourage, facilitate, attain,

and maintain a high degree of self-assessment and voluntary compliance by taxpayers. A

high degree of voluntary compliance allows the tax administration to concentrate its

resources on identifying and dealing effectively with those taxpayers who fail to fully

comply with their tax obligations. In effect, extensive self-assessment and voluntary

compliance by taxpayers, combined with targeted compliance and enforcement programs

that are based on risk assessment strategies, allows the tax administration to administer the

tax system effectively and efficiently by lowering administrative expenses and raising

revenues.

8. In developed countries, tax administrations have for years been embracing many

technological advances used in the private sector, such as electronic commerce, interactive

telephone systems, and data capture via the scanning or imaging of paper documents. Tax

authorities have been investing in redesigning their basic business processes and

implementing electronic receipt, processing, and delivery methods. They have been

facilitating increased use of the internet for transmission of information and access to tax

forms by taxpayers. Direct interfaces with the sources of information, that is, with external

information systems, are becoming increasingly common.

9. In developing countries, the opportunities that technology offers are more elusive

and the challenges are greater for several reasons. Tax administrations are confronted with

many external obstacles on the path to modernizing their organizations. Computer

equipment, data networks, and communications lines are still in short supply and

expensive in many countries, and governments have insufficient financial resources for

their acquisition and maintenance. Accordingly, electronic and internet tax filing systems,

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electronic funds transfer and payment systems, and integrated tax administration data

systems that enable electronic forms processing are options available only to a limited

degree for tax administrations in many developing countries that are engaged in the early

stages of information technology modernization efforts.

10. The need for effectiveness and efficiency in tax administration operations is often

vexing when dealing with hard-to-tax sectors of the economy. For example, small

businesses, farmers, and self-employed individuals in developing as well as developed

countries represent a large number of taxpayers, but they may lack the appropriate

bookkeeping and accounting records to determine and self-assess their tax liabilities. It is

very difficult and expensive for the tax administration to assess and collect taxes from

these groups. Consequently, many small businesses in the informal economy simply elude

the tax net and are not taxed at all. All tax administrations find this sector considerably

burdensome, given their large number, their pervasive nature and the relatively low

contribution to revenue collections. Administrations look to technology to help deal with

the massive numbers of taxpayers in this sector.

11. The small and medium businesses often exhibit the highest degrees of

noncompliance through underreporting, especially given the preponderance of transactions

conducted for cash. A key concern to address these risks is the ability by the tax

administration to use third-party information to cross-check taxpayer-declared data.

Proper availability of third-party information has been shown to increase tax compliance

the most. In addressing the compliance risk of under- or non-declaration of sales, some

administrations have sought to increase the monitoring of transactions as close as possible

to the source of the transaction.

12. The advent of ubiquitous technology, such as electronic cash registers that are able

to record sales in such a way that the information is considered tamper proof, has enabled

some tax administrations to attempt to undertake the monitoring of every transaction in

that taxpayer segment. In essence, these devices might be seen as becoming analogous to a

third party. The problem, however, is that these devices are not entirely disconnected from

taxpayers. As long as taxpayers can manipulate it or conduct transactions that the device

does not capture, it cannot be a reliable third-party data source.

13. The compulsory use of EFDs, such as ETRs or EFPs, has accelerated in recent

years in Africa and other regions, following a comparative lull in implementation activity

from 1994 to 2010. These devices are relatively costly, although they are claim to offer the

ability to provide a relatively secure mechanism for the tax administration to monitor and

detect non-compliance. However, the devices create additional compliance monitoring

requirements for the administrations. Moreover, as an analysis of survey responses shows,

EFDs appear to suffer from similar challenges as other regimes in the absence of effective

follow-up and enforcement measures.

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14. The available research indicates that robust data on the impact and effectiveness of

fiscal devices are sparse, and publicly available data that would allow an evaluation of

their effects post-implementation are similarly limited. This limitation makes it difficult to

validate the claimed benefits from fiscal device initiatives. Further, changes in revenue

collection trends that are claimed to be causally linked to these initiatives are not readily

isolated from other activities, whether policy or administrative reforms. Known research

available has not identified impacts on taxpayer compliance behavior.

15. The purpose of this project is to explore the use and impact of EFDs and associated

technology on taxpayer compliance and tax administration effectiveness. The research

proceeded on two fronts. In the first phase, a number of tax administrations that use this

technology and their experiences were reviewed. In the second phase, an online survey

was administered to a relevant sample group of administrations. The survey was supported

by two additional in depth case studies that provided a more detailed understanding of

country experience. Finally, to determine the compliance impacts on taxpayers, a smaller

survey was conducted that focused on a few representative groups in East African

countries. The results of the surveys are presented in Appendix I and Appendix II.

II. HISTORY OF ELECTRONIC FISCAL DEVICES

A. First Wave

16. The term Electronic Fiscal Device can be used to describe a wide variety of

technological devices that revenue administrations can use to help monitor business

transactions. These devices run the gamut from electronic intelligent seals customs uses to

monitor container traffic to fiscal control devices used to control excise tax control

through the automatic monitoring of production and delivery of excisable goods. In this

paper, the term EFDs will refer to devices normally used by tax administrations to monitor

business-to-consumer and business-to-business transactions that create a fiscal obligation

for consumption taxesusually for the sales tax or the value-added tax (VAT). A key

element of these devices is the presence of a fiscal memory, a tamper-proof memory

usually certified by a relevant government authority.1

17. The most commonly used EFDs are Electronic Cash Registers (ECRs) and EFPs.

The technology enabling the deployment of the first generation of ECRs became available

commercially at reasonable prices in the late 1970s, and ECRs started to be used by large

retailers in developed countries around that time. It is generally accepted that the first to

1 Sometimes EFDs are referred to as Fiscal Memory Devices. Typically, the fiscal memory contained in an

EFD is an Electronically Programmable Read Only Memory (EPROM) that is sealed and can only be accessed

by the tax administration or an authorized party. However, there are ways of tampering with EPROMs, as

discussed later in this document.

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use EFDs in support of its fiscal control strategy was the Italian administration, which

adopted fiscal devices in 1983 (OECD 2013). The Greek tax agency appears to be the next

administration to adopt fiscal devices, implementing them in 1988, and extending their

scope to include electronic signature devices (ESDs) in addition to the fiscal registers

adopted in Italy. Figure 1 shows the countries that are known to have implemented fiscal

devices internationally.

Figure 1. Adoption of EFDs Internationally

Source: IMF and responses from revenue administrations.

B. The Spread of EFDs

18. In the absence of any literature describing the gradual extension of their use, it

appears from anecdotal evidence and from the survey responses2 that the implementation

of EFDs progressed on a regional basis, spreading from its early Mediterranean base to the

neighboring former Eastern Bloc countries, before crossing the Atlantic to Latin America,

2 See Appendix 1, Question 6.

15

and then back across the Atlantic to Eastern Africa. Table 1 provides a timeline of

implementation.

Table 1. Current EFD Implementations

Country Year Type Scope

Europe

Greece 1988 ETR, EFP, ESD All VAT registered

Romania Pre-2000 ECR, ESD All VAT registered

Bulgaria 1993 EFP All VAT registered

Hungary 2014 ECR-SCU All VAT registered

Kosovo 2012 ECR, EFP, SCD All VAT registered

Montenegro 2001 ETR, EFP All VAT registered

Moldova 1993 ECR, EFP, ESD All VAT registered

Sweden 2010 ECR All VAT registered

Asia-Pacific

South Korea 2005 ECR, EFP All businesses

North America

Mexico Pre-2000 ECR, ESD All VAT registered

Central America

Dominican Republic 2009 EFP All VAT registered

Panama 2012 ECR, EFP All VAT registered

South America

Argentina 1995 ECR, ETR, EFP All VAT registered

Brazil (State level) 1994 EFP All ICMS registered1

Chile 2003 ECR, EFP, ESD VAT registered

(optional usage)

Paraguay2 2008/9 ECR, ETR Sector VAT registered

Africa

Kenya 2005 ALL All VAT registered

Tanzania 2010 ECR, ETR, ESD,

SCD

All VAT registered

Rwanda3 2014

Malawi4 2015(?) To be determined All VAT registered

Source: IMF and survey responses from revenue administrations.

Notes: 1 ICMS is a state-based goods and services tax. 2 Pilot project. Actual implementation on a limited basis planned for mid-2014. 3 Currently in process. Implementation date is proposed in 2014. 4 Under evaluation. Ministry of Finance has directed that EFDs be implemented. No firm implementation date has been set.

19. Some administrations, including the Bulgarian and Romanian tax agencies,

indicated they were using fiscal devices before 2000, possibly influenced by the

experience in Greece. The Argentine and Brazilian revenue administrations appear to have

followed suit. In line with its status as a large federal country, Brazil has adopted these

devices at the state level, although overall guidance was provided by the central tax

authority; the experience of Italys tax administration influenced the initial

implementations.

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20. Following a cluster of implementations in Latin America, Kenya was the first East

African country to next adopt fiscal devices, following the Mediterranean model, using

Greece and Italy as reference points. These three clusters (Italy and Greece in the

Mediterranean, Argentina and Brazil in South America, and Kenya in Eastern Africa)

appear to have been the starting points for further adoption by neighboring countries.

Given Greeces long familiarity with the use of EFDs, additional details on its experience

are presented in Box 1.

Box 1. Greece: Experiences with EFDsOverview of Electronic Fiscal Devices3

The requirement to use ETRs in Greece was passed into law in 1988. The mandatory use of these

devices was supported through a book and record keeping code. VAT revenue performance over the

period preceding ETR adoption as well as the period afterwards is shown in Figure 2. There is no

conclusive evidence associating EFDs with higher VAT to GDP ratio in Greece. The data show a

trend in positive VAT growth from1987 to 1988, with acceleration in the period following

implementation of ETRs. This suggests that the introduction of EFDs could have resulted in an

increase in the VAT to GDP ratio, at least in the initial years. Although plausible, this result needs to

be evaluated in light of other factors, including VAT policy reforms. In particular, in 1988 the Greek

authorities reduced the standard VAT rate (from 18 to 16 percent); that is likely to be a major cause

behind a reduction in the VAT to GDP ratio. This was followed by the reversal of this standard VAT

rate (from 16 to 18 percent) as well as an increase in both reduced and super-reduced rates that would

explain the subsequent increase in the VAT ratio. Moreover, despite an initial upward movement, the

overall trend from the period 1998 to 2010 has been flat or has shown negative growth, indicating that

any positive impact from ETRs has not been sustained.

Figure 2. Greece: VAT as a percent of GDP, 1987-2010

Source: IMF Data, authors elaboration

3 The source of this information is a European Commission technical note on proposals to extend the use of

ETRs in Greece

0

1

2

3

4

5

6

7

8

9

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

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The economic challenges facing Greece following the debt crisis subsequent to 2009 are well

documented, and these challenges are yet to abate in 2015. The Greek ministry of finance has

extended the use of ETRs to all retail sectors as of January 1, 2015, requiring the users to provide

monthly summaries of transactions from ETRs to a central information center.

These measures are designed to help further combat tax evasion through :

An ability to analyze the data submitted on a monthly basis and identify trends in evasion and higher risk segments or taxpayers

Improved security of information, since the transmission of the data to the government center makes it more difficult for businesses to adjust transaction information

Establishment of a foundation to increase payment cycles.

Different stakeholders have challenged these proposals, requesting the ministry to reconsider

expanding, and even rolling back, the requirements for ETRs. In the end, these requests were denied.

The main observations were :

ETRs have failed to make significant inroads in combating evasion: First, requirement to use ETRs have failed to address the well-documented and pervasive institutionalization of tax

evasion. Extending the use of ETRs may bring about only marginal improvements, if any.. It is

claimed that persons required to use these devices are finding mechanisms to thwart the recording

of all transactions, from simple means such as not using the devices to record transactions, to

understating the value of the transaction and using more sophisticated hacking tools such as

zappers and phantom-ware (these last two are discussed in section V).

Use of ETRs does not guarantee data integrity: Those required to use ETRs are finding ways to circumvent the capture of all transaction information. Accordingly, the requirement for traders to

provide a monthly ETR summary cannot by itself secure information, particularly if this

information is not captured in the first place. Moreover, the use of hacking tools prior to data

transmission can still result in the alteration of captured data.

Inherent institutional barriers will limit success: One of the key objections to the extension of the use of ETRs was that institutional arrangements are not being enhanced to either support the

extended use of ETRs or to exploit the information the devices gather. Second, the revenue

administration is still not well placed to leverage the data that will be gathered through these

systems, and create better compliance profiles and enhanced risk strategies to target low

compliance. The absence of a successful compliance model, coupled with effective enforcement

that is widespread and visible, will continue to hinder improvements in compliance. Extending

the use of ETRs may provide the illusion of an improved compliance mechanism, but ETRs alone

cannot be the solution to the underlying causes of noncompliance. These need be addressed

though administrative reform and effective compliance improvement programs.

21. Additional implementations have occurred in Asia, with South Korea adopting

fiscal devices in 2005. The Central American countries followed their southern

counterparts soon after the Chilean authorities introduced EFDs. Other administrations not

included in the survey sample have been identified as fiscal device users. Two recent

studies (Ainsworth, 2008 and OECD, 2013) highlighted the incidence of fraud-enabling

tools and techniques in countries that used electronic devices to record sales. Specifically,

Ainsworth noted issues in Quebec (Canada) and Japan, while the OECD study highlighted

18

the experiences of Germany and the Netherlands. The OECD study further listed a number

of countries that have attempted to combat fraud through the use of EFDsincluding

Belgium, Latvia, Lithuania, Malta, Poland, Portugal, Russia, Turkey, and Venezuela.

C. Current SituationUse and Technology

22. The use of EFDs is pervasive, and the technology is largely commonplace.

Production facilities are available in a number of developing countries, making the devices

available to businesses at reasonable costswhich declined from thousands of dollars to

hundreds of dollars. It is difficult to definitively establish the number of countries

currently using any form of fiscal device, as required by the tax administration. As part of

the research for this paper, several revenue administrations were identified as possible

users of fiscal devices. The sample of potential users was identified from the literature,

from references by revenue administrations known to use EFDs, and from direct

knowledge of IMF staff. Thirty-seven tax administrations were identified and invited to

participate in this study, predominantly through an online survey. Appendix III shows a

list of known fiscal device users at the time of the survey, as well as a list of probable

users.

23. Country responses were used as the basis for the analysis presented in the papers

following sections. The list of respondents appears in Appendix I. The participating

administrations appear on the map in Figure 1; the figure reinforces the idea that there has

been a clustering effect regarding the use of EFDs.

24. The underlying technology of EFDs can vary with the adoption of specific types of

devices based on the needs of the tax administration and the time of introduction. As

Table 1 shows, the survey respondents use various types of EFDs. To better understand

the choices available to administrations in selecting fiscal devices and the circumstances

for which each device is best suited, it is worthwhile to consider the devices in greater

detail. Box 24 describes the different types of EFDs that tax administrations currently

require.

4 The material for these descriptions has been supplemented from several sources, including: Ka-Ching! Ka-

Ching! The History of Cash Registers, Museum of American Heritage,

http://www.moah.org/exhibits/archives/kaching.html; Gaperi, IMF: Fiscal Affairs Department June, 2011,

Technical Note. MALAWI: Electronic Fiscal Devices (EFD) to enhance VAT Compliance; OECD:

Electronic Sales Suppression: A Threat To Tax Revenues, 2013.

19

Box 2. Overview of Electronic Fiscal Devices

Origins of the Cash Register

James Ritty invented the cash register, known as the Incorruptible Cashier, in 1879 to prevent staff

in his shop from skimming cash from any sale. Key features of this register included a display to

indicate the amount of the sale, a bell to ring up sales, and a total adder that summed all the cash

values of the key presses during a day. In 1884, the basic design was improved with the addition of a

paper roll to record sales transactions, thereby creating the receipt. In 1906, the addition of an electric

motor resulted in the first electric cash register.

Electronic Cash Registers

General Description

Today, many cash registers are essentially computers. Often cash registers are attached to weighing

scales, barcode scanners, and debit card or credit card terminals. These types of cash register are

functioning as point of sale (POS) terminals.

Point of sale systems provide the following operations:

Scan a product barcode for each item, and retrieve the price from a database.

Calculate deductions for items on sale.

Calculate any taxes.

Calculate differential rates for preferred customers.

Maintain inventory.

Time and date stamp the transaction, and record the transaction in detail, including each item

purchased.

Record the method of payment.

Keep totals for each product or type of product sold, as well as total sales for specified

periods, and perform other tasks.

POS terminals will often identify the cashier on the receipt and carry additional information or offers.

Electronic Tax Registers

General Description

ETRs are similar to electronic cash registers, but they have one key characteristic that differentiates

them: ETRs contain a fiscal memory that captures core tax information, typically the classification of

goods, value of goods sold, rate of tax, and tax value.

The fiscal memory is nonvolatile, meaning that the memory is nor wiped or reset by loss of power. It

can be accessed only by an appropriately authorized person with the relevant electronic key, typically

by the tax administration, to download data for detailed verification and analysis. The download

process does not erase the fiscal data.

Characteristics

ETRs may or may not be General Packet Radio System (GPRS)-enabled, that is, enabled to send data

over the mobile telephone network. GPRS allows the ETR to be accessed remotely by the tax

administration or ETR vendor for software updates, or to communicate information, for example, to

20

report daily totals or error situations. These later-generation devices allow the tax administration to

access the data without the need for an official to be physically present.

Benefits

ETRs have a separate and permanent memory that cannot in theory be accessed by anyone other than

the revenue administration. Any attempt to tamper with the independent and separate memory should

be visible through the use of anti-tampering devices, such as seals.

Limitations

ETRs typically cannot process refunds, or transactions for returned goods.

Target audience

These devices are best suited to smaller retail establishments and retail distributors of petroleum

products.

Electronic Tax Register

Electronic Fiscal Printers

General Description

EFPs are used in conjunction with other types of sales recording devices. Typically, larger retail

institutions operate some form of POS and EFPs used in conjunction with the POS system to capture

fiscal information. The printers contain a fiscal memory that exhibits the same characteristics as

described for ETRs.

Benefits

Fiscal printers are potentially the cheapest option for a fiscal device. They will typically connect to an

existing electronic cash register and provide the fiscal receipt, as well as maintain fiscal information

for the revenue authority. They carry the same security features described for ETRs.

Limitations

EFPS must be used in conjunction with a sales recording device and are not a complete solution in

their own right.

Target audience

The target audience for EFPs is similar to ETRs and, in conjunction with POS terminals, includes

larger retailers.

21

Fiscal Printers

ETRs have a separate and permanent memory that cannot in theory be accessed by anyone other than

the revenue administration. Any attempt to tamper with the independent and separate memory should

be visible through the use of anti-tampering devices, such as seals.

Electronic Signature Devices

General Characteristics

An ESD is a device that provides a unique signature to an invoice. This signature appears a

hexadecimal (that is, base16) hash on a printed invoice/receipt. ESDs are typically used where a

computerized sales and invoicing solution is in place. The ESD is plugged into the computer network,

and any request to generate a receipt or invoice results in the ESD generating a hash key that is printed

to the document. The key is based on a series of mathematical processes applied to key information on

the invoice. As a result, no signature is ever the same. Any change to the invoice after it is generated

results in a different hash key.

Benefits

ESDs provide an additional level of security to invoices issued. The inclusion of a digital signature,

typically composed on an algorithm based on data contained in the invoice, provides an additional

level of validation. The digital signature is also stored on the issuing device, and any invoice can be

validated for authenticity based on the unique signature.

Limitations

The ESD requires other devices to record the sales information, as the ESD itself typically does not

record detailed transaction data. It would usually be implemented in conjunction with a fiscal printer.

22

Target audience

ESDs are used in medium-sized businesses or retail situations where there is a likelihood of returned

sales.

Electronic Signature Device

Sales Control Devices (Modules)

General Characteristics

Sales control devices (SCDs) combine the features of an ESD with the provision of a fiscalized

external memory.

Benefits

SCDs provide all the benefits of an ESD, allowing for an easy check on the integrity of the data on the

receipt. Relevant receipt data are kept securely in the control unit. A SCD allows many cash receipting

devices to be connected or networked to the SCD, thereby reducing the need to deploy fiscal devices

for each register or terminal.

Limitations

As these devices are typically designed for larger enterprises, the use of a SCD may require the

implementation of an electronic signature, or encryption key, issued by either the revenue

administration or a certified certificate provider. The need for such additional signatures is dependent

on the trade communitys broader community adoption of electronic commerce.

Target audience

The target audience consists of large retail networks or businesses with several geographic sites.

25. Some survey respondents mentioned other devices in use for specific purposes (for

example, in vending machines), which also perform the core fiscal functions as described.

Figure 3 summarizes the responses and identifies the types of devices in use. ECRs are the

most common device; however, to be relevant for fiscal purposes, they need to be used in

conjunction with some other form of fiscal device, typically a fiscal printer. Survey data

support this assumption, as EFPs are the second most common device. Details on the

Other category can be found in Appendix I, Question 14.

23

Figure 3. Types of Fiscal Devices in Use in Surveyed Countries

Source: IMF EFD Survey, authors elaboration

III. DRIVERS FOR EFDS

26. The major limitation of documentary control of transactions for tax purposes is

that every fiscally relevant document is nothing more than a declaration of the occurrence

of a transaction that may or may not have taken place. The creation of such a document

only depends on the good will of the taxpayer and the coincidence of interests of the

economic operators involved. This limitation has been the underlying reason for the use of

third-party information for cross-checking taxpayer-declared data, and for the search by

tax administrations for a technological solution that can produce a reliable and transparent

control reference for fiscal operations.

27. Many survey respondents have indicated that one of the main reasons for

implementing EFDs was to secure tax information for audit purposes (see Appendix 1,

Question 20). No additional details were given by respondents in their answers to this

question on how the secured information is used in audit activities. It may be used to

identify abnormal transaction behavior and thus higher risk candidates for audit purposes;

it could be used to determine resource allocation for audit; or it could be used to assert that

once collected by the revenue administration, that version of the data is now held as the

source of true information. In any event, the survey does not shed light on this important

issue.

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Electronic Cash

Registers

Electronic Tax Registers

Electronic Fiscal

Printers

Electronic Signature Devices

Sales Control Device

Other

24

28. If indeed the primary purpose for EFDs is to secure tax information for audit

purposes, this should lead to an improvement in audit outcomes and potentially an

improvement in audit productivity. Resources will not be assigned to low-value cases;

cases selected for audit will be selected on the basis of higher risk to compliance, leading

to a higher hit rate; the information secured is of a higher quality and cannot be altered;

and taxpayer records will automatically coincide with the information held by the revenue

administration. Compared with paper-based regimes, there are additional compliance

requirements for taxpayersthe obligation to use an EFD, moreover, to use only an

officially approved EFD, and the obligation to submit information as and when required.

These additional requirements are the necessary price to pay for the additional level of

control obtained through the use of EFDs.

29. From the tax administrations perspective, it would be expected that the use of

EFDs would lead to an improvement in audit outcomes, with the same number or even a

lower number of auditors. However, according to the survey responses, some

administrations have actually increased their audit resources as a consequence of

introducing EFDs. It would be interesting to analyze whether any revenue improvements

are the direct result of the devices or are due to the additional field compliance staff

deployed in parallel with the EFDs. Unfortunately, it is not possible to distinguish the

revenue impacts attributable to each initiative.

30. The responses from survey participants indicating that the devices are needed to

secure information for audit purposes suggest that the administrations involved are still

not fully addressing declaration risks (non-reporting and/or underreporting), or that they

still want additional tools to address them.5 In any event, these risks cannot be adequately

addressed only through the use of EFDs.6 This situation points to the need for more

comprehensive reforms to leverage the benefits of these devices, eventually allowing the

administration to direct attention to other priority areas. Specifically, survey results

support the need for an approach based on overall compliance strategies in order for the

tax administration to address these risks properly.

31. The next most common reason given for the use of EFDs is the need to record

sales and transactions and to improve VAT compliance. These reasons were followed by

the need to enhance data collected by the administration; to properly record cash sales; to

create a stable revenue base; and, finally, to seek reductions in compliance costs, as cited

5 To get a complete picture for audit purposes, other sources of data are required, including, for example, sales

and purchase invoices from clients and suppliers, and data on income and earnings. The EFD data are only one

source.

6 To some extent, an EFD is used as a type of third-party information source. However, it is risky to do so and

consider this source as fully trustworthy, because the transaction is close to the taxpayer and far from tamper-

proof.

25

by five administrations. Although survey respondents were able to provide alternative

reasons for implementing fiscal devices, only two administrations mentioned other

reasons. Both of these administrations referred to the need to address invoicing problems,

either to reduce fraudulent invoices or to ensure that invoices are issued and sales are

recorded. A more detailed discussion of these drivers is presented in the next section.

A. Mandated Implementation

32. The survey asked respondents whether the use of fiscal devices was mandated by

law (Appendix I, Question 8). With the exception of one administration, all respondents

indicated that the use of fiscal devices was mandatory; in some cases, where gradual

adoption was cited, this implied mandatory use was by the affected economic sector.

Usually, once the legislation requiring implementation of EFDs is passed, all taxpayers

who meet the stipulated criteria (for example, those who are registered for VAT or who

meet a predetermined turnover threshold) must comply. It is necessary to accompany the

legislation introducing the devices with the mandatory requirement that the devices be

used in all circumstances and with detailed regulations to ensure that their use conforms to

the needs of the tax administration.

33. These regulations can be quite complex; their preparation, regular updating, and

enforcement can involve significant resources. Since any failure in requiring that all

affected taxpayers adopt these devices would reduce the perceived benefits of independent

verification of transactions, tax administrations have to develop enforcement strategies to

ensure compliance. These strategies usually involve regular field audits and publicity

campaigns encouraging consumers to request tickets for every transaction. These actions

are accompanied by suitable channels to denounce noncompliance, and even by the use of

fiscal lotteries to award prizes to consumers who collect their tickets and send them

regularly to the tax administration. All of these measures can be costly and require

considerable resources that often could be used elsewhere with better results.

B. Drive for Administrative Efficiency

34. The use of technology has often been viewed as a major tool to reduce

administrative effort and compliance costs, from the perspectives of both tax

administrations and taxpayers. An underlying assumption in terms of cost reduction is the

availability of appropriate infrastructure to enable the broad adoption of technological

advances. A further prerequisite to obtain greater efficiencies is the adoption of a broader

strategy that places fiscal devices in a framework of automation that would yield benefits

for government, the tax administration, and the business community.

35. The five survey respondents indicated that a driving factor in adopting EFDs was

to achieve administrative efficiencies. It is not evident from any of the responses that this

particular outcome was measured, or indeed whether any administrative efficiency was

26

achieved at all. Interestingly, as cited in the interviews on the compliance burden

(Appendix II), representatives of the business community claimed that fiscal devices were

introduced in Kenya to overcome shortfalls in the ability of businesses to capitalize on

new technology,7 thereby providing an overall gain in administrative efficiency of the

economy. However, this reason was not mentioned in the survey response from the Kenya

Revenue Authority (KRA), where the claimed benefit for the adoption of EFDs was only

the increased revenue achieved.

36. It is reasonable to infer that the adoption of some form of EFD, when implemented

as part of a broader technology-enabled administrative reform program, would create

administrative efficiencies to both taxpayers and the revenue administration. According to

discussions with the National Tax Service (NTS) of South Korea, an advocate of the use

of EFDs, several studies have been independently undertaken in that country to attempt to

quantify the savings from implementing automated fiscal services. These studies,

however, do not discriminate potential gains for the use of EFDs alone; they instead refer

to broad-based technology improvements.8 Further research and analysis are required to

identify eventual reductions in compliance costs, and whether these reductions result in

true overall savings or are merely a transfer of a cost from the administration to taxpayers.

C. Compliance Response and Impact of Adoption of EFDs

37. The underlying hypothesis for this research project was that the adoption of EFDs

was a direct response by tax administrations to combat non-compliance. Analyzing the

survey replies, the drivers for adopting fiscal devices largely center on matters of

compliancesecuring information to verify, to record sales, and to improve VAT

compliance. Current trends in tax administration usually describe compliance as covering

four key areas of the tax cycleregistration in the system, timely filing or reporting of

obligations, timely payment of obligations, and timely provision of accurate information

to the tax administration. In the next section, we analyze the survey results to assess the

impact of the devices in these four areas.

38. The use of EFDs, and the associated requirement that taxpayers and the tax

administration only use fiscalized invoices, can be interpreted as a driver to ensure

improved compliance with the formal obligation to accurately record transactions.

Revenue administrations that have adopted compliance improvement strategies have

sought to embed the collection of information as a key component and an automatic

7 See Budget Speech, Minister of Finance, Kenya,

http://www.statehousekenya.go.ke/speeches/budget/budget04-05.pdf.

8 For example, one study that the Korea Institute of Public Finance conducted estimated the total savings from

e-invoicing (business-to-business only) as exceeding KWN 700B per annum, claiming this amount represented

tax revenue loss avoided and administrative savings.

27

process in the day-to-day routine of the affected businesses. Embedding information

collection on transactions automatically and independently of the actions of the taxpayer is

deemed to increase the quality and reliability of information, compared with normal

document-based recording of transactions.

39. Some tax administrations have implemented remote communication with the

devices, either through the use of mobile phone networks or through transaction

processing value-added networks. This approach would enable obtaining information

regularly, typically overnight, or, as in the more ambitious schemes proposed by some

administrations, on a real-time basis,9 thereby addressing the timely reporting requirement.

The survey did not specifically ask respondents to identify in detail the compliance

challenges that administrations face prior to implementation. Further inquiry would be

necessary to determine if other risks existed (other than those of inaccurate reporting),

how pervasive the risks were, and what the underlying causes of the risk were to be able to

more adequately assess if fiscal devices appropriately addressed the identified risks.

40. Respondents were asked to identify the benefits obtained from adopting EFDs

(Appendix I, Question 40). Figure 4 summarizes the responses to this question. The most

quoted benefit is improvements in reporting of sales. However, less than half of those

administrations in the survey responding in this way have actually measured these

outcomes by identifying baseline data and post-implementation upturns. In their responses

to the same question, eight administrations also reported improved compliance in filing

rates (with five actually measuring these impacts); six administrations reported an

increase in registrations (two indicated they had measured impact in this area).

41. However, no respondents indicated that they undertook an assessment of changes

in compliance behavior based exclusively on the use of these devices, comparing the

situation before and after implementation.10

A number of administrations regularly

measures compliance and analyze trends in this area, but the impact of individual

measures such as the use of EFDs is never assessed independently. Thus, claims of

improvements in compliance behavior because of the use of EFDs are based on anecdotal

evidence and are not supported by actual data.

9 The Tanzanian tax authorities originally contemplated the concept of real-time data collection but decided

against it. The South Korean authorities informed that the NTS is in early discussions with cash receipt system

operators to enable real-time capture. In December 2013 the Argentine authorities approved an updated

regulation calling for a new generation of devices incorporating real-time capture of data.

10 The only country that undertook such an analysisthough not giving details in the survey responsewas

Dominican Republic, as discussed later in Section V.A.

28

0

2

4

6

8

10

12

14

16

Increased reporting of sales

Improved filing rates

Increased registrations of

those previously outside the system

Other

Impacts were measured

Figure 4. Reported Benefits of Fiscal Devices

Source: IMF EFD Survey, authors elaboration

42. In general, the aim of reform actions in either policy or administration is to

improve voluntary compliance, reduce tax gaps, increase revenue collection, and raise the

administrative effectiveness. All reform efforts are accompanied by estimates of the

expected results; methods to measure the impact of reforms need to be developed to assess

the outcomes. A reduction in the VAT gap is usually seen as a reliable measure of an

improvement in compliance; however, in the absence of regular and consistent measures

of the revenue gap by a reputable source, an increase in the ratio of VAT collection to

overall tax collection may be considered as a general indication of improved compliance.

This is especially the case in developing countries in Africa, where it is still not customary

for tax administrations to measure revenue gaps regularly.

43. For the most part, tax administrations have not required the implementation of

EFDs in isolation from other measures, whether policy changes, such as changing the

revenue base, as in Tanzania with the removal of retail petroleum sellers from the VAT

base, or other administrative reform initiatives, such as the online filing and payment

process (YESONE) introduced in South Korea in 2006. In South Korea, the subsequent

extension of the Hometax solution integrated some credit allowance for taxpayers based

on VAT receipts captured electronically from 2004 to 2008.

44. As indicated, the success of tax reforms is often measured through the additional

revenue generated through those reforms; this has been the case with the adoption of

EFDs. For example, the immediate and noticeable rebound of VAT revenue claimed in the

Kenyan experience has been often cited as a success story that merits consideration by

other governments and tax administrations, particularly in the neighboring countries.

29

Closer examination of the Kenyan experience (see Appendix IV) may suggest that the

success is not as obvious as first presented. As Figure 5 shows, when viewed over a longer

term, Kenyas VAT performance is not as dynamic as claimed or as expected.

Box 3. Kenya: Experiences with EFDsAn Analysis of Revenue Performance

EFDs were introduced in Kenya in fiscal year 2004/05 when legislation was enacted to take effect

January 1, 2005. EFDs currently used in Kenya primarily consist of ETRs that are mandatory for all

businesses registered for VAT purposes. VAT revenue performance over the period preceding EFD

adoption as well as the period afterwards is shown in Figure 5.

Figure 5. Kenya: VAT as a percentage of GDP, 19912013

Source: Authors elaboration, based on IMF data.

The graph confirms that value-added taxation as a percentage of GDP in Kenya has shown significant

variations from 1990 through to projected performance for 2013. In the period from the introduction

of EFDs (2005) until around 2012, when there was a marked drop off in VAT collections, a pervasive

system of VAT withholding was in place that boosted collections by almost 1 percent of GDP. The

increase in VAT revenue that occurred over this period was most likely because of VAT withholding

and non-payment of VAT refund claims, rather than EFDs. In sum, the introduction of EFDs in

2005 has not generated a sustained revenue increase over a general trend of improvement since

2001. Based on this longer-term view, it would be difficult to build a case arguing that EFDs have

contributed to significant improvements in revenue performance in Kenya.

0

1

2

3

4

5

6

7

8

9

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

VA

T (p

erc

en

tage

of

GD

P)

Kenya: VAT (percent of GDP)

30

IV. ANALYSIS OF SURVEY RESPONSES

A. Scope of Fiscal Devices

45. The survey responses indicate that the administrations have focused on the last link

in the sales chain in their attempt to curtail unreported cash sales. Thus, the scope for all

administrations includes business-to-consumer transactions. In addition, administrations

have also attempted to curtail irregularities such as invoice fraud by including

business-to-business transactions in the coverage of their fiscal devices. The results of the

survey (Appendix I, Question 16) show that 70 percent of the responding administrations

require EFDs to be used for both business-to-consumer and business-to-business

transaction.

46. All of the administrations that participated in the survey have adopted a VAT or a

tax similar to a consumption-based tax. In some cases, as in Brazil, a federal country, the

consumption tax is levied at the state level and is administered using EFDs. Argentina,

another federal country, has a national VAT and state-level sales taxes that are also

administered through EFDs.11

Survey responses show that fiscal devices have been

implemented to control and improve compliance for taxpayers registered for the VAT or

its equivalent. Some administrations have extended the use of these devices beyond the

VAT. The South Korean authorities, for example, have extended the requirements for

EFD use to all businesses, while the Tanzanian authorities are considering options that

could include an extension of EFDs to all businesses.

B. EFDs and the Compliance Model

47. The introductory section of this paper discusses modern trends in the use of

compliance risk models as recommended by the IMF, the World Bank, and other regional

and multilateral organizations.12

The underlying reasons for this growing interest in

compliance improvement models is the acknowledgement that, to maximize compliance

with the relevant tax laws, tax administrations need to adopt risk-based methods to deploy

resources effectively to meet the greatest revenue risks. In line with this approach, survey

respondents were asked to identify the key risks they faced and to indicate whether they

considered alternative approaches to the use of EFDs to mitigate these risks.

11

Through special agreements with the states (provinces), the information is collected by the AFIP, the federal

tax agency. Subsequently, the information on the local sales tax is transferred to the respective provincial tax

administration.

12 The OECD has been active in consolidating and distilling compliance initiatives across both OECD and non-

OECD countries, summarizing initial views on this matter in Compliance Risk Management: Managing and

Improving Tax Compliance, Guidance Note, 2004. This was subsequently updated in Managing and

Improving Compliance: Recent Developments in Compliance Risk Treatments, Information Note, 2009.

31

48. Forty-seven percent of survey respondents indicated that they had undertaken an

assessment to determine the revenue at risk from underreporting of sales. (See Appendix I,

Question 21). In their responses, estimates of the revenue at risk associated with this

specific type of noncompliance ranged from a high of about 50 percent of VAT revenue to

about 20 percent of total VAT collectionboth very significant amounts. Since the survey

did not specifically ask for additional details on revenue risks, it is not clear whether the

deployment of EFDs helped to mitigate these revenue risks, or if risks remained prevalent.

As noted, while a number of tax administrations reported improvements in compliance,

less than half of the administrations responding to the survey actually measured the

alleged changes in compliance, including by measuring changes in the VAT compliance

gap.

49. Table 2 lists the main risks that tax administrations identified before

implementation of fiscal devices; these risks are mainly associated with the underreporting

of sales and poor quality of information on sales. The table also lists the risks related to

the use of EFDs that administrations identified after EFD implementation. The major risks

remained unchanged, although there is no quantification of their incidence in both

instances.

Table 2. Comparison of Risks Pre- and Post-Implementation of Fiscal Devices

Risks Identified Pre-Fiscal Devices Risks Identified Post-Fiscal Devices

Answer Options Response

Percent

Response

Count

To record cash

sales (previously

not recorded)

56.3 9

Enhance VAT

compliance 75.0 12

Enhanced sales

data provided to

revenue

authority

62.5 10

Create stable

revenue base 56.3 9

Secure tax

information for

audit purposes

87.5 14

Record sales

and transactions 75.0 12

Reduce tax

collection costs 31.3 5

Other (please specify) 2

Answer Options Response

Percent

Response

Count

Traders avoid

using EFDs 100.0 15

Traders can now

employ "zappers"

to reduce total

sales recorded

40.0 6

Fines issued to

traders for not

using EFDs are

not increasing

compliance

40.0 6

Traders report the

machines do not

work properly

47.0 7

Source: IMF Fiscal Device Survey.

50. At the core of the compliance improvement model is the requirement for

administrations to identify risks, quantify them, and, on the basis of the risks importance

32

and their causes, develop appropriate mitigation measures. An implicit assumption of this

study was that the implementation of EFDs is a response to specific risks. About half of

the respondents undertook risk assessment and indicated that they considered alternative

risk treatments (Appendix I, Question 18). The most frequently mentioned alternative

measures were taxpayer education, additional audit treatments, other technology options,

and alliances with business associations. It is clear from their description that, while these

options were considered valid in their own right, they are complementary rather than

alternative measures.

51. Most administrations chose to implement fiscal devices in conjunction with other

alternative compliance measures (Appendix I, Question 19 and Question 46). Given this

mix of measures in the recorded responses, reported compliance changes cannot be solely

attributed to the implementation of fiscal devices. This point is highlighted in the Box 4,

summarizing Tanzanias experiences with EFDs (Appendix IV presents a full description

of the case).

Box 4. Case StudyTanzania

The VAT was introduced in Tanzania in 1998, replacing a sales tax and a number of other indirect

taxes. Although the approaches to the administration of VAT have varied, the effectiveness of the tax

has never reached the levels originally anticipated. As Figure 6 shows, total VAT collection has been

increasing steadily in nominal terms, but it has been relatively flat as a share of GDP.

Figure 6. Tanzania: VAT Collections (gross and percentage of total collections), 19982013

Source: TRA and authors elaboration.

Note: Data for 2011/2012 are preliminary; data for 2012/2013 are projected (Source: IMF).

In response to what was perceived as a drop in overall VAT compliance, the Tanzania Revenue

Authority (TRA) in 2002 mandated the use of nonfiscalized ECRs. Figure 6 suggests that the use of

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

0

500

1000

1500

2000

2500

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

2008/09

2009/10

2010/11

2011/2012

2012/2013

billionsTanzanianShillings

Domes cVAT(billionsofTZS)(LHS)

Domes cVATaspercentageofGDP(RHS)

33

ECRs did not contribute to significant improvement in real VAT revenue performance from 2002 to

2008. The Tanzanian authorities announced in 2008 that they would move beyond ECRs and explore

the use of EFDs to improve overall VAT compliance. Mobile telephony-enabled EFDs were adopted

starting the 2009/10 fiscal year for all registered VAT taxpayers, and a nine-month window was

established to implement the devices across all sectors. In a rather unusual approach to the

deployment of these devices, the Government of Tanzania would reimburse to taxpayers for the costs

of the first purchase of EFDs. As part of the implementation package, the TRA determined that EFD

implementation should proceed according to a big bang approach, that is, all VAT taxpayers should

start using EFDs at the same time. A number of circumstances, including a national general election

that took place over the proposed deployment period, resulted in a slower than planned

implementation pace, and effective operation of EFDs did not begin until January 2011.

It is still relatively early in the implementation cycle to allow for a definitive assessment of the

Tanzanian experience. Figure 6 suggests that adoption of the requirement for VAT-registered traders

to use ECRs coincided with a period of VAT revenue increases from 2002 to 2005, but that this

increase did not prove to be sustainable from 2005 to 2011. Some anecdotal evidence suggests

compliance difficulties in Tanzania. Despite penalties established in the regulations for taxpayers that

fail to comply with their obligations, EFDs appear to suffer from similar challenges as other regimes

if there are no effective follow-up and enforcement measures. Absent effective compliance monitoring

and enforcement, overall VAT compliance cannot be improved, with or without EFDs.

C. Administrative Impacts

52. The introduction of new compliance measures is typically accompanied by an

associated cost to the administration in monitoring the compliance measure and to the

affected taxpayers in addressing the requirements of the new rules. These costs can

constitute one-off costs associated with development and implementation and additional

recurrent costs to manage and support the changes. To gauge these costs, survey

respondents were asked a number of questions associated with the development of

regulations, the preparation of projects, and the implementation and operation of the fiscal

devices. The introduction of fiscal devices was typically undertaken by a dedicated project

team, with nearly 75 percent of administrations allocating dedicated resources to an

implementation project (Appendix I, Question 26).

53. In addition to the dedicated project team, some survey respondents identified the

need to supplement existing resources. The detail regarding the additional staffing

required is included in Appendix V. Information on the additional roles that EFD project

staff had to carry out appears in Questions 28 (initial staff requirements) and 39

(additional resource needs identified after EFD implementation). Eleven administrations

identified the need for additional staff; the predominant area identified was the audit. The

survey did not request additional details. Accordingly, no information is available on how

these additional staff resources have been used, that is, to extend existing audit programs

based on better targeting risks, to provide additional audit capacity for auditing fiscal

34

devices, or to meet the increased need resulting from additional taxpayers brought into the

systemor a combination of these factors.

54. Another area that required additional staff was managing the devices. This

included roles such as certifying devices (ensuring certain models are in compliance with

the regulations), managing devices (initializing and registering), and liaising with

suppliers. Some revenue administrations have outsourced the work of certifying devices,

while others have established in-house technical committees or have employed staff to

manage certification directly. These are typically new roles for revenue administrations

and bring with them new skills. A more detailed discussion of the impact of approaches to

managing EFDs is presented in the section Decisions Regarding Technology.

55. No administration stated that additional resources were required to analyze the

increased information that became available to the revenue administration as a result of

deploying EFDs, something not implicit under the category additional audit resources. It

is possible that existing research or intelligence units in the administrations have taken the

initiative to seek insights from this information. However, no administration identified the

benefits of access to this increased volume and detailed information as a key resource for

managing compliance.

56. The new workloads and the associated new staff requirements required funding

through some mechanism. Details on estimates of staff numbers (projected and additional

needs identified after implementation) are shown in Appendix V. Eleven administrations

identified additional staffing needs. Of those, nine administrations provided details of how

the additional staff was funded (see Appendix I, Question 28). One agency received

additional funding for its budget, three used combined new funding and existing staff